IMF Cottarelli Warns Some Countries Might be Cutting Debt Too Quickly

Some countries, including the U.S., could be trying to bring their budget deficit down too quickly, posing a risk for the economic recovery, the head of the International Monetary Fund's fiscal affairs department warned Wednesday.

Although over the last couple of years, the IMF has called on countries to step up the pace of adjustment when the IMF thought these countries were moving too slowly, too much adjustment could also hurt growth directly, Carlo Cottarelli wrote in a blog posting on the policy Web site VoxEU.

In the current environment, I worry that some might be going too fast, Cottarelli wrote.

If the European debt crisis intensifies, the world could be dragged into another recession. The IMF forecasts economic growth in Europe for 2012 will contract 0.5 percent.

Cottarelli reiterated the IMF view that efforts to cut high levels of public debt should be gradual and steady.

The IMF estimates the average budget deficit in the advanced economies will fall by a total of two percentage points of gross domestic product in 2011 and 2012. The decline is even larger in the Eurozone, which is forecast to drop about three percentage points of GDP.

In a reasonably good growth environment this pace of adjustment would be fine, Cottarelli wrote. But in the current weaker macroeconomic environment bringing deficits down this quickly could pose a risk for the economic recovery.

He noted that some advanced economies with limited access to financing such as Greece, Ireland and Portugal have no option but to stick to their deficit reduction plans this year.

However, the IMF official said that on current policies, the U.S. government's budget deficit would decline by over two percentage points of GDP in 2012, the largest single year adjustment in four decades.

That's too much, Cottarelli wrote, adding that renewing the payroll tax cut and extending unemployment compensation for the long-term unemployed would provide welcome support to the economy.